Welcome to the November 2008 issue of GuerdonNews®.

In this issue we consider it timely to put forward a checklist and suggestions for avoiding moral hazard in executive pay, assess APRA’s disclosure on their advice to the government on banker pay regulation, evaluate ACSI’s executive pay requirements, reiterate good and not so good advice some have for banker pay, and provide a remuneration committee checklist for determining a fair market comparison group for setting executive pay levels.

We conclude with the latest on executive and director remuneration disclosure updates available on the GuerdonData® on line database and references to Guerdon Associates in the news media.

Paying executives to avoid moral hazard – a checklist for boards

The term moral hazard has been used extensively in the context of the credit crisis in regard to the consequences of bailing out banks and not exposing either shareholders or executives to the downsides of excessive risk taking.

But moral hazard does not necessarily imply immoral behaviour or fraud. Rather, the term is used by economists to describe inefficiencies that can occur when risks are displaced, rather than the ethics or morals of the involved parties. When a party is insulated from risk, it may behave differently than if it were fully exposed to that risk.

Moral hazard has become a major issue for executive pay packages. If an executive team is rewarded for the positive outcomes of good investments, but insulated from the negative consequences of investments that turn sour, then we may encourage excessive risk-taking. Many company boards faced with the prospect of an economic downturn are being pressured to review their executive pay plans. In some cases change is justified. In others it is not.

In this article we provide options for the board remuneration committee's consideration when it addresses the extent that moral hazard is present in their company's executive pay plans.

APRA speaks on executive pay regulation

The Australian Prudential Regulation Authority (APRA) has stated it has adopted a principles-based approach focused on structure and incentives.

This will not only be important for the pay of APRA regulated companies, as such an approach could, over time, be applied through various mechanisms to all listed companies.

The chairman of APRA, John Laker, told the Senate Standing Committee on Economics that the issue of executive remuneration was not entirely new to the regulator, which last year prepared a paper for a Reserve Bank conference in which it had referred to agency risk – the risk that the interests of management might not be aligned with the interests of shareholders and creditors.

ACSI releases ASX 100 executive pay study and lobbies for change

Last week ACSI released its annual study of ASX 100 CEO remuneration. And, as with past studies, it calls for change in executive remuneration.

While boards and regulators should be cognisant of ACSI's views because its members invest hundreds of billions of dollars in ASX listed companies, they are arguably more significant this year than for a decade. This is because its views on executive pay matters are being listened to more closely than usual by the federal government.

This is not just a reflection of tumultuous times and this government’s readiness to expound on the excesses of executive pay. It also reflects the long association “industry” funds have with Australia’s trade unions and, by extension, the Labor party that is now in power.

A checklist for remuneration committees for executive pay market rates

The Australian Council of Superannuation Investors (ACSI) did score a point when they released their review of ASX 100 CEO remuneration last week.

They said that there have been several examples of companies providing large increases on executive fixed pay without adequate explanation. This is contrary to Corporations Act 300A requirements.

So what should be provided in directors’ remuneration reports that would demonstrate compliance with the Act’s requirement that “The directors' report for a financial year for a company must also include…discussion of…board policy for determining, or in relation to, the nature and amount...of remuneration of the key management personnel for the company”?

In addition, what should the remuneration committee watch out for in reviewing market rate assessments for their company's executive pay?

It seems everyone has a view on banker executive remuneration

Last month we alerted subscribers to the government’s thinking on banker pay regulation with Prime Minister Rudd’s address to the UN after our first warning that this may happen way back in May.

Since then, it seems methods to pay bankers are oozing from every corner.

But some are better than others.

Latest GuerdonData® Updates

This month’s updates to GuerdonData® include disclosures from the following 110 companies:

AUSENCO LIMITED, ABACUS PROPERTY GROUP, ADMIRALTY RESOURCES NL
AUSTEREO GROUP LIMITED, ALLIANCE RESOURCES LIMITED, ASCIANO GROUP, AJ LUCAS GROUP LIMITED, ARROW ENERGY NL, ASPEN GROUP, AUSDRILL LIMITED, AUSTRALIAN WEALTH MANAGEMENT LIMITED, AVOCA RESOURCES LIMITED, AUSTRALIAN WORLDWIDE EXPLORATION LIMITED, APEX MINERALS NL, BABCOCK & BROWN COMMUNITIES GROUP, BABCOCK & BROWN WIND PARTNERS GROUP, BABCOCK & BROWN CAPITAL LIMITED, BHP BILLITON LIMITED, BOART LONGYEAR LIMITED, BEACH PETROLEUM LIMITED, BROCKMAN RESOURCES LTD, BLUESCOPE STEEL LIMITED, CABCHARGE AUSTRALIA LIMITED,, CBH RESOURCES LIMITED, CUDECO LIMITED, CENTENNIAL COAL COMPANY LIMITED, CAPE LAMBERT IRON ORE LTD, CHARTER HALL GROUP, CONSOLIDATED MEDIA HOLDINGS LIMITED, CARBON ENERGY LTD, COFFEY INTERNATIONAL LIMITED, COCKATOO COAL LIMITED, CRANE GROUP LIMITED, CITIGOLD CORPORATION LIMITED, COPPERCO LIMITED, DAVID JONES LIMITED, DOWNER EDI LIMITED, EMECO HOLDINGS LIMITED, ENERGY DEVELOPMENTS LIMITED, ENVESTRA LIMITED, EASTERN STAR GAS LIMITED, FUTURIS CORPORATION LIMITED, FKP PROPERTY GROUP, FELIX RESOURCES LIMITED, FORTESCUE METALS GROUP LTD, FLEETWOOD CORPORATION LIMITED, GINDALBIE METALS LTD, GLOUCESTER COAL LTD, GEODYNAMICS LIMITED, GOODMAN FIELDER LIMITED, GIRALIA RESOURCES NL, GOODMAN GROUP, GUNNS LIMITED, HENDERSON GROUP PLC, IBA HEALTH LIMITED, INDUSTREA LIMITED, INDEPENDENCE GROUP NL, JABIRU METALS LIMITED, KAROON GAS AUSTRALIA LIMITED, KINGSGATE CONSOLIDATED LIMITED, KAGARA ZINC LIMITED, LEND LEASE CORPORATION LIMITED, LINC ENERGY LTD, LYNAS CORPORATION LIMITED, MARION ENERGY LIMITED, MIRABELA NICKEL LIMITED, MINCOR RESOURCES NL, MINERAL DEPOSITS LIMITED, MIRVAC GROUP, MOUNT GIBSON IRON LIMITED, MINERAL RESOURCES LIMITED, MACQUARIE, LEISURE TRUST GROUP, MINTAILS LIMITED, MONADELPHOUS GROUP LIMITED, MOLY MINES LIMITED, MOLOPO AUSTRALIA LIMITED, NEWCREST MINING LIMITED, NUFARM LIMITED, NEXUS ENERGY LIMITED, ONESTEEL LIMITED, PRIMEAG AUSTRALIA LIMITED, PANORAMIC RESOURCES LIMITED, PERILYA LIMITED, PLATINUM AUSTRALIA LIMITED, PMP LIMITED, PRIMARY HEALTH CARE LIMITED, PLATINUM ASSET MANAGEMENT LIMITED, REDFLEX HOLDINGS LIMITED, RAMSAY HEALTH CARE LIMITED, RIDLEY CORPORATION LIMITED, SAI GLOBAL LIMITED, SUNDANCE RESOURCES LIMITED, SEVEN NETWORK LIMITED, SPECIALTY FASHION GROUP LIMITED, SONIC HEALTHCARE LIMITED, SALMAT LIMITED, SYLVANIA RESOURCES LIMITED, SMS MANAGEMENT & TECHNOLOGY LIMITED, STRIKE RESOURCES LIMITED, SERVICE STREAM LIMITED, SUPER CHEAP AUTO GROUP LIMITED, SUNCORP-METWAY LIMITED, TASSAL GROUP LIMITED, TRANSPACIFIC INDUSTRIES GROUP LTD, UNITED MINERALS CORPORATION NL, UXC LIMITED, VALAD PROPERTY GROUP, WESFARMERS LIMITED, WOOLWORTHS LIMITED, and WATTYL LIMITED

Executive and director remuneration data from all ASX 300 companies on GuerdonData® is available to any subscriber. Visit our website for more information on GuerdonData®.

Assess how easily you can find out director and executive pay information by viewing our 6 minute demo. Click on the “More Info” button below.

Guerdon Associates In The News

“Executive pay packets under fire”, James Thompson, SmartCompany.com, 07 October 2008 http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081007-Executive-pay-packets-under-fire-.html

“Executive pay”, Michael Robinson interview by Paul Comrie-Thomson, Counterpoint, ABC Radio National, 13 October 2008

“Investors must halt the exec gravy train”, David Tribe, Letters, Australian Financial Review, 17 October 2008, p. 64

“Accounting changes lower the hurdles”, Patrick Durkin and Annabel Hepworth, Australian Financial Review, 27 October 2008, p. 6

“Make sure everyone’s on the same page”, Michael Robinson, Australian Financial Review, 1-2 November 2008, p. 62